Matters:
The company released the 2023 Annual Report and the 2024 First Quarter Report. In '23, the company achieved revenue of 2.46 billion yuan, -0.4% year on year; net profit to mother of 430 million yuan, -3.5% year on year; deducted non-net profit of 420 million yuan, -2.4% year on year. In 24Q1, the company achieved revenue of 690 million yuan, +23.1% year on year; net profit to mother of 120 million yuan, +29.4% year on year; deducted non-net profit of 120 million yuan, +40.4% year on year.
Commentary:
Domestic sports grass demand is under pressure, and the diversified business layout is seeking the long term. (1) By product, in 2023, the company's sports grass/leisure grass/pavement business and others achieved revenue of 5.6/16.8/210 million yuan, respectively, -6.6%/+1.2%/+5.4% compared with the same period last year. The same decrease in income from sports grass is either due to domestic sports facility construction plans being forced to be delayed due to tight local financial resources. In 2023, the sales volume/revenue of recreational grass in the international market increased by 15.0%/0.80%, respectively. The average price was under pressure in the short term, or mainly due to the year-on-year decline in raw material procurement costs, intense market price competition, and an increase in sales share in Europe where product prices are low. The same increase in sales revenue from the pavement business and other types of sales was mainly due to the growth of diversified businesses. (2) Looking at the subregion, the company achieved revenue of 28/2.16 billion yuan in domestic and overseas respectively in 2023, -3.5%/+0.1% year-on-year, and domestic revenue decreased year-on-year. The company is planning to promote the artificial turf system paving service business in the domestic market, which is expected to pave the way for expanding the overseas sports grass market. (3) By sales model, the company's direct sales/wholesale achieved revenue of 6.6/1.79 billion yuan respectively in 2023, +0.5%/-0.7% year-on-year.
Multiple factors have driven the improvement in gross margin, and expenses have been rising steadily during the period. 1) In '23, the company achieved a gross profit margin of 31.6%, +2.8pct year-on-year, thanks to improved raw material costs/a relatively low exchange rate of RMB against the US dollar/continued promotion of procurement cost reduction. On the cost side, the company achieved a sales/management/R&D/finance expense ratio of 5.4%/4.2%/3.4%/-1.4%, compared to +0.8/+0.3/+0.2/+1.6pct. Among them, the increase in sales expenses was mainly affected by the increase in travel expenses and marketing expenses during the period, while the year-on-year decrease in exchange revenue led to a significant increase in financial expenses. Taken together, the company achieved a net profit margin of 17.5%, -0.6pct year-on-year. 2) In 24Q1, the company achieved a gross profit margin of 30.5%, -1.8pct year over year. On the cost side, the company achieved a sales/management/R&D/finance expense ratio of 5.2%/4.1%/2.8%/-2.1%, compared with -0.4/-0.3/-0.5/-3.5pct, overall improvement on the cost side.
During the period, the company achieved a net interest rate of 17.6% to mother, a slight increase of 0.8 pct.
Investment advice: Overseas demand has clearly recovered, maintaining a “strong” rating. In the past, the downturn in the overall overseas consumption environment suppressed the growth of the artificial turf industry to a certain extent, thereby suppressing the company's valuation.
Benefiting from the annual increase in the penetration rate of the artificial turf market and the increase in product application scenarios, combined with factors such as stabilized overseas inflation, energy prices and improved supply chain conditions, the company's artificial turf sales in the European market have basically returned to pre-Russian-Ukrainian conflict levels, and the overall demand side is improving. We expect net profit to be 5.3/6.4/740 million yuan for 24-26 (the value was 59/680 million yuan before 24/25), corresponding PE of 18/15/13X, and the target price for the company is 28.4 yuan/share according to the DCF model, maintaining a “strong push” rating.
Risk warning: downstream demand falls short of expectations, rising raw material prices, etc.